Shares of Global-E Online (GLBE 5.07%) have been hammered since September, falling about 60% since then. Global-E helps small and medium-sized businesses (SMBs) expand internationally by assisting them with the barriers that come with international e-commerce, and the company experienced amazing growth in its most recent quarter. However, shares have not fared as well as the business' financials might let on.
Global-E reached a peak of $80 per share in September after rising rapidly from its IPO in May 2021, but sits at $34.91 per share at the time of this writing. Global-E is seeing rapid growth and impressive adoption from its existing customers, but is this enough to push the company back up to its all-time highs by the end of 2022? Let's find out.
The cause of the fall
Global-E has been caught in the middle of the tech sell-off that has taken place over the past few months. The tech-heavy Nasdaq index has fallen almost 18% from its highs, and many other high-growth companies have fallen more than that. This broad swath of stocks has been falling in large part because of the Federal Reserve's plans to increase interest rates to combat inflation in the U.S.
Global-E's valuation was also extremely high at the beginning of its drop. In September, the stock was valued at 50 times sales -- an astronomically high price even for a service provider for e-commerce companies. Riskified (RSKD 5.22%), another e-commerce service provider, traded at just 24 times sales in September. Now, it trades at 19 times sales, which is still high compared to Riskified's current level of five and could fall even more over the coming months. The company earned this high valuation because shares jumped over 160% in less than six months after its IPO.
While inflation concerns hit the growth-oriented tech sector hard, it has hurt Global-E stock especially hard. Because the company operates in the e-commerce space and the price of goods its customers sell are being raised in line with inflation, some investors worry that Global-E will see slower growth as interest rates rise and e-commerce activity potentially falls. This could also affect the company's gross margins in a negative way. Global-E makes money on the back of its customers' sales growth, so if it's customers make less money but use Global-E's services the same amount, Global-E will receive less revenue for a similar amount of services provided. This has yet to take place, however. Global-E's gross margins improved from 30.7% in third-quarter 2020 to 38.6% in Q3 2021.
Why I love Global-E
Despite concerns about the short-term prospects of Global-E, the long-term future for the company is bright. It has become a need-to-have product for businesses of all sizes to expand internationally -- which can be a difficult endeavor when a business is trying to do so independently. When expanding internationally, there are lots of barriers and points of friction between a U.S.-based business and an international customer.
Global-E helps businesses minimize these frictions with the partnerships and connections it's cultivated with different payment processors, language systems, shipping providers, and currency systems around the world, making it easy for a domestic e-commerce company to sell its products to international customers.
The alternative to using Global-E to resolve these frictions is to develop partnerships, experience, and knowledge in-house -- a process that is long and expensive. This is an especially tough venture for SMBs, which is partly why the company has just 2% customer churn.
Global-E makes money on the e-commerce customers' gross merchandise volume (GMV), so when customers do better, Global-E does better. If the company does a good job helping its customers expand internationally, it will see revenue growth and net retention rate expansion -- both of which have been happening. In Q3 2021, the company reported 77% revenue growth to $59 million, and its net retention rate has consistently topped 140%.
Global-E has also developed a strong relationship with Shopify (SHOP 2.63%). The partnership gives the company a stake in Global-E in exchange for opening up Global-E's services to Shopify merchants. This partnership is incredibly beneficial: Global-E now has access to over 1.7 million SMBs, many of which are looking to expand abroad.
In Q3 2021, the company lost $28 million, but it was free cash flow positive for the period. Global-E generated $5 million in free cash flow over the same period. Combining this with the fact that the company has over $391 million in cash and no long-term debt, its loss should not be a huge concern for investors while it's in this stage of growth.
Will Global-E reach $80?
With shares 60% off their all-time highs, the company would have to jump a staggering 147% to reach $80 per share. Considering the average annual return of the broader stock market is roughly 9%, the idea of Global-E growing 150% is unlikely given the headwinds it faces in 2022.
However, if investors have a time horizon of more than one year, the likelihood of reaching and even surpassing those all-time highs looks much better. Because of the company's strong product and sticky customer base, I think it is more than reasonable to assume that shares could reach and likely surpass their highs over the next five years. Long-term investors might want to consider buying shares at these lower prices.